Input Tax Credit — how it works under GST

What is Input Tax Credit?

Under GST, a business charges tax (output tax) on its sales and also pays tax (input tax) on its purchases. Input Tax Credit (ITC) allows the business to subtract the input tax already paid from the output tax payable, remitting only the net difference to the government. Without ITC, every link in the supply chain would pay tax on a base that already includes earlier-stage taxes — known as the "cascading effect" or "tax on tax."

Worked example

Suppose a retailer buys goods for ₹1,00,000 and pays 18% GST of ₹18,000 to the supplier. She then sells the goods for ₹1,40,000, charging 18% GST of ₹25,200 to her customer.

Without ITC, she would have paid ₹25,200 in full, even though ₹18,000 of tax had already been collected at the previous stage.

Eligibility conditions — Section 16

Section 16 of the CGST Act 2017 lays down four mandatory conditions that must all be satisfied before ITC can be claimed:

1. Valid tax document: The taxpayer must hold a tax invoice, debit note, or other prescribed document issued by a registered supplier.
2. Receipt of goods/services: The goods or services must have been actually received (constructive receipt rules apply for goods in installments — ITC is available only after the last installment is received).
3. Tax paid by the supplier: The supplier must have paid the tax to the government and filed the return. Under Rule 36(4), ITC is restricted to what appears in the buyer's GSTR-2B, which only includes invoices the supplier has declared.
4. Return filed: The taxpayer claiming ITC must have filed their own GST returns (GSTR-3B).

An additional condition: if the supplier's invoice is not paid within 180 days of the invoice date, the ITC already claimed must be reversed proportionately. It can be re-claimed once payment is made.

Blocked credits — Section 17(5)

Section 17(5) specifies a list of inputs and input services on which ITC is not available, regardless of whether they are used for business. These are known as blocked credits. Key categories include:

GSTR-2B matching — the ITC control

GSTR-2B is an auto-drafted, monthly statement on the GST portal that shows the ITC available to a taxpayer based on the invoices their suppliers have filed in GSTR-1 or the Invoice Furnishing Facility (IFF). It is generated on the 14th of every month for the previous tax period.

Since Rule 36(4) was tightened, ITC in GSTR-3B can only be claimed up to the amount reflected in GSTR-2B. Claiming ITC not appearing in GSTR-2B means claiming ITC for invoices the supplier has not yet reported — this attracts interest at 18% per annum on the excess amount.

Best practice: Download GSTR-2B each month, reconcile it against your purchase register, and follow up with suppliers whose invoices are missing before the 14th of the following month.

ITC reversal rules

ITC already claimed must be reversed in the following situations:

• Supplier invoice unpaid after 180 days — proportionate ITC must be reversed and can be re-availed on payment.
• Used for exempt or personal use — ITC on inputs used partly or fully for exempt supplies or personal purposes must be reversed under Rules 42 and 43.
• Capital goods partly used for exempt supplies — reversal calculated on a 5-year apportionment basis.
• Credit notes issued by supplier — if the supplier issues a credit note reducing tax, the buyer's ITC must be reduced accordingly.
• Registration cancelled — all ITC in the electronic credit ledger must be reversed on the date of cancellation.

Time limit to claim ITC

ITC on any invoice or debit note must be claimed no later than the earlier of:

• The due date of filing the GSTR-3B for September of the financial year following the one in which the invoice was issued (typically 20 October), or
• The date of filing the annual return (GSTR-9) for that financial year.

For example, an invoice dated 15 July 2023 (FY 2023-24) must be claimed in GSTR-3B by 20 October 2024 (the due date of the September 2024 return) or the date of filing GSTR-9 for FY 2023-24, whichever comes first. ITC not claimed within this window is forfeited permanently.

How clean purchase records protect your ITC

Every ITC claim must be backed by a valid invoice carrying the supplier's GSTIN, a correct HSN code, and the exact tax amount. Invoices with errors — wrong GSTIN, missing HSN, incorrect rate — can be rejected during departmental scrutiny, resulting in demand and interest.

Using BillRaja's GST billing software means your own purchase orders and sales invoices are always issued with the correct GSTIN, HSN codes, and GST rates. When your suppliers issue invoices that match your purchase orders exactly, reconciling them against GSTR-3B and GSTR-2B becomes a straightforward process rather than a month-end scramble.